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The wall between Japanese banks and securities firms crumbles

Jun

30

1993

0

By David Luhman

The wall between Japanese banks and securities firms crumbles

With this many government bonds looking for purchasers, the government knew it had to find buyers apart from the unwilling and overextended banks. Thus, the government allowed the securities firms in 1984 to begin chukoku funds. These were mutual funds that allowed individuals to buy medium-term (five year) government bonds. The funds were highly liquid, and offered market rates that exceeded those rates available from regulated bank deposits. Also, to enhance the utility of government bonds, the MoF allowed securities firms to extend loans to people who used government bonds as collateral for the loan. Securities firms had essentially vaulted the wall set up by Article 65 and entered the banking business.

As a consolation to the banks, and as a means to increase marketability of government bonds, finance ministry officials allowed banks in 1983 to underwrite and then in 1984 to deal in government bonds. Previously, because government bonds were securities, banks could not underwrite nor deal in them. But with trillions of yen worth of old government debt to rollover, and with trillions more of new debt to issue, government officials dismembered Article 65 with the new Banking Law of 1981.